British economy sends mixed signals as Brexit divorce begins

For years, workers have seen pay eaten away by rising prices
By William Schomberg
|hrreporter.com|Last Updated: 03/31/2017
European Council President Donald Tusk leaves after a news conference after receiving British Prime Minister Theresa May's Brexit letter in notice of the U.K.'s intention to leave the bloc under Article 50 of the EU's Lisbon Treaty to EU Council President Donald Tusk in Brussels, March 29. REUTERS/Yves Herman

LONDON (Reuters) — Britain's economy is sending mixed signals about its readiness for Brexit just as British Prime Minister Theresa May launches the process of pulling the country out of the European Union.

Economic growth was resilient in 2016, confounding forecasts of a quick and painful hit after June's Brexit vote.

There have been recent signs that exporters are benefitting from the pound's fall and a pickup in the world economy.

But consumers, typically the main drivers of British growth, appear to be turning more cautious.

OVERALL ECONOMIC GROWTH

The economy grew by 1.8 per cent in 2016, second only to Germany among the Group of Seven big rich nations. In quarterly terms, growth sped up at the end of last year, prompting the Bank of England to raise its forecast for early 2017. The BoE and the government's forecasters expect growth of 2.0 per cent this year. Other economists are less optimistic, forecasting growth of 1.6 per cent, according to a Reuters poll.

Most of the BoE's policymakers expect the pace of growth to slow as 2017 progresses but they showed "differing degrees of confidence" about that forecast at their meeting this month when one rate-setter voted to raise borrowing costs and others said they might follow suit.

INFLATION ON THE RISE

Inflation is rising quickly in response to the sharp fall in the value of the pound since the Brexit vote and the rise in global oil prices over the past year. It jumped to 2.3 per cent in February and the BoE predicts it will peak at 2.8 per cent in the first half of next year, above its 2 per cent target. Many economists say inflation is heading above 3 per cent.

WAGE GROWTH STUMBLES

British workers have seen their pay eaten away by rising prices for many of the years since the financial crisis. A brief respite, caused by inflation's fall to zero in 2015, is set to end soon. Pay growth, adjusted for inflation, was the lowest since October 2014 in the most recent data. The BoE expects pay will rise 3 per cent in 2017, up from the most recent reading of 2.2 per cent, but its forecasts have often proven too optimistic.

CONSUMERS FEEL THE PINCH

Britain's shoppers proved the forecasters wrong by carrying on spending freely after the Brexit vote, helping the economy to withstand the shock. But that seems to be changing. Retail sales shrank at the fastest rate in nearly seven years during the past three months, despite a pickup in February.

Data published on Wednesday showed growth in consumer credit in the three months to February was the weakest since July 2015, at 8.7 per cent.

However, consumer confidence has remained robust and house prices continue to grow, adding to the mixed picture.

CAN EXPORTERS MAKE UP THE DIFFERENCE?

Exporters are getting a boost from sterling's fall, as well as a recovery in the economies of Europe and the United States. Net trade made a rare positive contribution to economic growth in late 2016. And in the three months to January, volumes of goods exports showed their biggest increase in a decade. But there are big questions about what happens after Brexit. Britain has chosen to prioritize migration controls over access to the EU's single market which accounts for about half of Britain's exports. BoE Deputy Governor Ben Broadbent has said the current "sweet spot" for exporters might not last, given the prospect of barriers to trade with the EU or a likely appreciation of sterling if Britain secures a good deal.

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